Digital payment systems and financial services have become an essential part of modern technological infrastructure, growing exponentially over the past three decades and continuously innovating to meet the demands of the international financial system.

Research indicates that widespread adoption and use of digital financial services could provide access to an additional 1.6 billion unbanked and underbanked people. By 2025, this could increase the GDPs of all emerging economies by 6% percent, or a total of $3.7 trillion.

Yet despite this increased potential for wrongdoing, the pervasiveness of cybercrime that we observe today is not inevitable. Rather, this modern epidemic of cybercrime is sustained via the transfer of capital associated with virtual currencies.

While many digital services implement Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols, criminal entities have demonstrated innovative rigour in their efforts to continuously abuse the loopholes and take advantage of selective enforcement and defensive vulnerabilities that plague the financial services sector today.

The international financial system is constantly facing new threats as technology proliferates and diversifies.

Three in four money laundering cases involve digital currencies

Increasingly, individuals and syndicates use these systems to bypass traditional indicator and warning systems relied upon by regulators and law enforcement.

While digital currency is still a relatively specialized market, one continuous issue has been the increasing number of security breaches and thefts on digital currency exchange platforms.

This is because there are few cryptocurrency exchanges that perform KYC procedures and basic security checks, both of which have been commonplace protocols in major exchanges for over a decade. Money laundering can easily take place in these virtual environments, as they can provide high levels of anonymity and low levels of detection.

Money laundering through digital currency and payment systems is just one example of illicit activity online. Other criminal markets include child pornography, weapons and drug sales, hackers and murder for hire, zero day exploits, and false identity documents.

Three-legged stool

The advent of these criminal markets enabled by anonymous virtual currencies has created a global bazaar for criminals and organized crime to reach a mass global market.

Collectively, these digital infrastructures represent a three-legged stool of illicit activity: it allows for the storage of illicit goods and services; it provides utility of financial vehicles to allow for the exchange of goods and services; and it develops techniques to successfully transport the illicit goods and services around the world.

The goal of Follow the Money: Civilizing the Darkweb Economy is to “civilize” one leg of the stool—the utility of financial vehicles to allow for the exchange of illegal goods and services and the application of AML practices to curb cybercrime.

Before launching into potential policy prescriptions, however, in order to properly understand

why virtual currencies are central to the increasing prevalence of cybercrime and the serious financial implications of this, it is useful to conceptualize what is meant by “digital currencies”, and to examine innovation in the realm of virtual currencies and the underlying technology involved in payment systems.

Digital Currencies 101

Digital currency is defined as digital certificates of ownership of real currencies or precious metals, with the digital certificate being the virtual currency.

Digital currency is distinct from common mediums of exchange because it is not funded by a central bank or government. The borderless features of the internet allow this privately issued currency to complete instantaneous transactions worldwide.

In regard to digital currency, there are generally two main types: centralized and decentralized.

Centralized digital currency is stored in a central repository, where users can exchange the digital currency with other account holders.

When converting conventional currency into digital currency, these central repositories typically partner with currency “exchangers,” who are responsible for the conversion.

A large quantity of digital currency is purchased from the central repository by the exchangers, who then credit the account holder after receiving the conventional currency. When account holders wish to convert their digital currency to a conventional currency, a reverse transaction is carried out back through the exchangers.

Bitcoin

Decentralized digital currency, the most well-known of which is Bitcoin, has no central monetary authority and is instead exchanged through a peer-to-peer payment system consisting of its users’ computers and devices. This means that the digital currency is a direct exchange, and there are no intermediaries.

The digital currency is generated, or “mined,” by a mathematical algorithm on computers which can execute complex number-crunching tasks. The network of user computers is used to both monitor and verify the creation and transfer of digital currency between users. A log is maintained of every transaction between users, which is updated by user machines participating in the mining of this currency.

Since their creation, Internet-based virtual currencies such as Bitcoin, the Chinese AliPay and Russian Web- Money systems have appreciated with incredible speed. Bitcoin’s capitalization is $100 billion globally, while WebMoney possesses that value in Russia alone.

Strategic Opportunity for Action

Cyberspace is not a peaceful environment.

In 2018 cybercrime conspiracies will become increasingly punitive and destructive. As the use of virtual currencies and financial systems continues to increase and innovate, so too does global crime.

Fintech firms themselves present significant ‘operational risks,’ lacking the incentive for proper intrusion detection or KYC/AML protocols. Given that 50% of all crimes now have a cyber component, it is high time that we follow the money to create an international e-forfeiture fund. The modern epidemic of cybercrime and cyberespionage can also be mitigated through modernization of existing authorities to empower the Financial Action Task Force (FATF), the Financial Crimes Enforcement Network (FinCEN), and the Treasury Forfeiture Fund (TFF) to combat cyber-money laundering.

Virtual currencies and other alternative payment systems that facilitate money-laundering associated with cybercrime, as well as terrorist financing, must be held to account.

Every digital payment service should abide by KYC and cooperate in all law enforcement initiatives regarding cybercrime conspiracy, or it should be shut down.

We can prioritize this effort through the establishment of an international Fund, maintained by the forfeiture of all money laundering and terrorist financing seizures. Proceeds from the Fund will be allocated specifically to critical infrastructure protection of the global financial system.

The Fund would represent a global public/private partnership to combat money laundering using these alternative payment systems.

Furthermore, creating global, enforceable rule sets through such a public/ private partnership could help the private sector flourish and simultaneously meet the needs of the unbanked and underbanked throughout the world.

Virtual currencies who refuse to know their customers or freeze accounts of those engaged in criminal conspiracies should be subject to Treasury Executive Office for Asset Forfeiture (TEOAF).

International coordination

The strategic plan must be international in nature and thus incorporate the Bank of International Settlements (BIS), an organization that has been at the forefront of fostering international coordination in the pursuit of monetary and financial stability for over eight decades.

Global crime is facilitated by the use of cyber currencies, and more needs to be done to regulate and supervise digital payment systems and ensure basic KYC and information reporting protocols.

The US, in partnership with the BIS, can incentivize the international community to participate in this effort by the capital gains that will ultimately be afforded as a result of hindering criminal activity from the illegal buying and selling of goods and services.

Finally, due to lack of incentives for developing nations to participate, we must provide the proverbial “carrot”. In order to facilitate international cooperation, 40% of the funds forfeited must be distributed to the host countries’ critical infrastructure protection efforts or other international efforts to secure payment systems and e-governance.